Owners'
Equity refers to the contribution of investments of the owner
and the result of business operation comes from income / sale and expenses or
the profit and loss statement.
Owner's Equity also known as
Stockholders’ Equity, Shareholders’ Equity, Net Worth, and Capital and commonly
known with the following accounting formula:
Asset = Liabilities +
Owner's Equity
Owner's equity refers to as
the residual of assets minus liabilities.
Owner's Equity = Assets –
Liabilities
Owner's equity has different
representation in each type of business in respect with the result of operation:
In a sole proprietorship or partnership, it is stated as the owners’ or
partner's capital account
In a corporation, it is stated as retained earnings
Owner's
equity can be increased in two ways:
Owner's equity is the
measure of a company's net worth and is computed by subtracting total
liabilities from total assets. It is also identified as shareholder's equity or
book value and it comes from two main sources:
- Increase in owner’s capital contributions - Paid-in capital involves capital received from investors in exchange for stock in the company. The paid-in capital pertains to the amount that the corporation received when it issued its common and preferred stock. When the stock had a par value, the total par value of each class of stock is recorded in a separate "par" account.
- Increase in successful business operation or profit of business operation - Retained earnings represent the aggregate net income or successful business operation minus the dividends declared of the corporation.
The examples of Stockholders Equity are as follows:
- Preferred Stock
- Common Stock
- Paid-in Capital Stock
- Treasury Stock
- Retained Earnings
Preferred stock has higher
claim on the assets and earnings than common stock. The type of ownership in corporation
which generally has a dividend that must be paid out before dividends to common
stockholders and the shares usually do not have voting rights. It is also known
as preferred shares.
Preferred shares holders
entitle their full value in the liquidation of the company before common shares
holders. Other type of preferred shares can be converted into common shares.
Common
stock
Common stock refers to corporate
equity ownership with security. They have the right to vote called voting share
or ordinary share that can be used in other part of the world. Common shares can
perform better than preferred shares or bonds over time. Common stock holders
cannot be paid dividends until all preferred stock dividends including payments
in arrears are paid in full.
Common stock investors
receive nothing in the event of bankruptcy, unless there is remaining funds
after creditors including employees, bondholders, and preferred stock holders
are paid.
Common stock holders can
able to influence corporation through votes to establish the corporate
objective and policy, and electing the company's board of directors. There are many
benefits of common stock include earning dividends and capital appreciation.
Treasury
Stock
Treasury shares are shares
of common stock that the issuing company has repurchased. In addition,
reacquired stocks pertains bought back by the issuing company and reduce the
amount of outstanding stock on the open market. It is also called government
bonds or gifts. These accounts have always negative value and represent the
company’s purchase of its own stock.
Treasury stock can be
repurchase or buyback from shareholders; or it can never be issued to the
public. These shares have no dividends, have no voting rights, and should not
be included in shares outstanding calculations.
Three different treasury stock
transactions: purchasing, selling, and retiring. The further details of the
different transactions will discuss for the next articles.
Additional
Paid in Capital (APIC)
These accounts refer to the value
that is often included in the contributed surplus account in the shareholders'
equity. The account represents the excess paid by an investor over the
par-value price of a stock issue. Additional paid-in-capital can arise from
issuing either preferred or common stock.
Paid in capital or contributed
capital pertains to capital contributed to a corporation by investors through
purchase of stock from the corporation. This account does not reflect the
amount of capital contributed by any specific investor. Instead, it shows the
aggregate amount of capital contributed by all investors.
Retained
Earnings
Retained earnings refer to
the portion of net income, which is retained by the corporation rather than
distributed to its owners as dividends.
When the corporation got losses
from the result of operation, the retained earnings take losses too. It means
the retained earnings reduce at the end of accounting cycle. Retained earnings are
cumulative from year to year with losses offsetting earnings.
Contra
Owner’s Equity Accounts
Owner's equity and
stockholders' equity accounts are both normally have credit balances. Contra
owner's equity accounts are the classification of owner equity accounts with
debit balances. The examples are as follows:
Owner’s Equity contra account – Owner’s
Drawings
Stockholder’s Equity contra account –
Treasury Stock
Owner's
Equity or Stockholders’ Equity has Temporary Accounts
These are revenues, gains,
expenses, and losses, which are income statement accounts. Revenues and gains
are the source of owner's equity increase. When the company performs services,
generate sales of product, and increases its assets, owner's equity will
increase. Expenses and losses are the sacrifice cost to generate income
resulted in owner’s equity or stockholders equity decrease. These temporary
accounts will be closed to retained earnings or owners’ equity at the end of
the normal accounting cycle or one-year business operation.
